Stock Market News

As Johns Hopkins University of Medicine’s Coronavirus Resource Center revealed a recent increase of coronavirus cases in the Southern and Southwestern United States, the VIX ticked up. With fears of the outbreak curve not flattening, how will this impact markets?

The Volatility Index (VIX) was established by the Chicago Board Options Exchange in 1993 to gauge volatility in the financial markets. Referred to colloquially as the “fear index”, it measures the next 30 days of anticipated volatility for the U.S. Stock Market via S&P 500 options. For reference, during the peak of the 2008 financial crisis, it topped out at 89.53. During periods of relative calm, it’s not unheard of to trade below 10. On March 16 of this year, the VIX reached 82, thus demonstrating how volatile investors expected markets to be due to the uncertainty of the coronavirus.

On February 12, 2020, the Dow reached 29,551.42 and the S&P 500 rose to 3,379.45. But by the end of February, these major indices experienced their greatest fall since 2008, ushering in a market correction.

Coronavirus and its Impact on the Markets

Starting in early March, the COVID-19 pandemic began taking a negative toll on stock markets worldwide, the worst since 2008. On March 9, the Dow fell 2,158 points, or 8.2 percent, during the day’s lows. Other major U.S. markets were not spared – the S&P 500 fell 7.6 percent and the Nasdaq dropped 7.3 percent.

On March 12, the U.S. stock indices dropped more. The S&P 500 fell another 9.5 percent, along with the Dow falling 2,353 points, almost 10 percent lower. For the Dow, it was the worse one-day performance since Oct. 19, 1987’s drop, bringing it back to 2017 levels. While there was hope of a sustained rally beginning on March 13, it was dashed when the Dow Jones fell nearly 13 percent or 2,997.10 points, and the S&P 500 dropped nearly 12 percent on March 16.

Factors Contributing to the Crash

While the stock market crash in 2020 was directly attributable to the coronavirus outbreak worldwide, many experts, including the International Monetary Fund (IMF), view the coronavirus as speeding up a global slowdown that was already in the works.

Despite the St. Louis Fed’s data that showed the United States had an unemployment rate of 3.6 percent in late 2019, the nation’s industrial output peaked in 2017, and experts noticed a declining trend at the start of 2018. The IMF also believed the United States-China trade war made global growth more challenging going forward.

There were other concerning factors about economic growth domestically and internationally, causing fear a worldwide recession was beginning. March 2019 saw the U.S. yield curve inverting – which means longer-term debts yield less than shorter-term debts. The ISM Manufacturing Index fell below 50 percent in August 2019, dropping to 48.3 percent in October 2019, and remaining below 50 percent through 2019.

When it comes to rising COVID-19 cases, the state of California saw 4,515 new cases over 24 hours, as reported on June 21. Florida’s reports on June 20 and 21 saw the number of cases increase by 4,049 and 3,494, respectively. Other Southern and Western states, such as Nevada, Missouri, and Utah, reported one-day records in increases of coronavirus cases as well.

With Georgia, Alabama, Florida, and California, among others, showing concerning trends for increased coronavirus infection rates, analysts at Deutsche Bank expressed concern about how the virus may keep spreading. According to the same research, there’s some trepidation on how it may negatively impact economic growth. Depending on the overall hospital capacity to handle a resurgence in severe COVID-19 cases, how well the medical infrastructure responds will influence how the economy functions going forward.

With the number of increasing cases shifting from the Northeast to Southern and Western states, it’s feared that there will be another panic on Wall Street as reopening the economy is postponed, further stunting economic activity.

Research from Jefferies Financial Group found that even though coronavirus cases are increasing, it’s not the only or the biggest worry. Jefferies’ research found that for investors, the biggest concern is how well and how fast the economy bounces back.

Analysts believe that there needs to be more than just action by The Federal Reserve to inspire market confidence. The research found four main concerns, which included the effects of COVID-19:

• 6.6 percent of respondents said the upcoming election is the most important factor
• 12.1 percent of respondents said a second wave of COVID-19 is the most important factor
• 31.1 percent of respondents said The Federal Reserve’s decision is the most important factor
• 50.2 percent of respondents said the shape of the recovery is the most important factor

As the economy reopens and medical experts become more knowledgeable and better prepared to deal with COVID-19 through therapies and equipment for hospitalizations, it seems that investors will be taking a more holistic investing approach.

According to the futures market, Chicago Mercantile Exchange contracts are forecasting a drop of 27 percent in dividends over 24 months for the S&P 500 index. Dividends are projected to fall to $42.05 in 2021, a drop from 2020’s dividend of $47.55 and 2019’s high of $58.24. Looking forward to 2026, according to CME’s futures contract, the dividend is expected to recover to $56.65. While the latter years are not as likely as what’s up next, it’s worth taking note.

Although these dividend levels have already been announced, the future doesn’t look much brighter. According to Goldman Sachs, Q2 economic growth is expected to drop by 34 percent. Even though the COVID-19 economic crisis is expected to be worse, we can get an idea of how bad by comparing it to the financial crisis of 2008. From 2007 to 2009, the S&P 500 dividend dropped by 25 percent; it took 48 months to recover from this drop. Based on this historical look-back, chances are it’ll take longer to get back to par this time around.

It’s noteworthy to highlight companies that suspended their dividends in April 2020, and when they last suspended their dividends, historically speaking. Dine Brands Global (DIN) initially paused its stock-buyback program. This was followed up with a suspension of its quarterly dividend of 76 cents. Royal Dutch Shell lowered its dividend by two-thirds to 16 cents per share, the first time since 1945. These examples illustrate just how dire the economic situation is for companies around the world.    

Cash Dividends Explained

A cash dividend is money distributed to stockholders according to a corporation’s present earnings or amassed profits. Dividends are declared and issued by a board of directors that determines whether they’ll remain the same, increase or decrease. 

Understanding the Need to Reduce or Cut Dividends

A dividend cut often results in a drop in a company’s stock price since it indicates a weakened financial position. Oftentimes, dividends are cut because earnings are dropping or there’s less money available to pay the dividend, which can be due to increasing debt levels.

The point here is that dividend cuts are a poor sign for a company that is facing financial difficulties due to reduced revenue, with the same overhead still needed to be paid (rent, wages, insurance, debt servicing). While dividends can be cut for short- or long-term reasons, such as buying their own stock back or buying out another company, with the ongoing coronavirus situation the majority of businesses aren’t doing it for positive reasons.

While reducing or removing a dividend from a company’s stock can divert cash for ongoing operations or debt servicing, it also can tell the markets things aren’t going well financially. This is illustrated by looking at AT&T. In December 2000, the company reduced its dividends by 83 percent, lowering it to 3.75 cents, versus the expected 22 cents by shareholders.

One of the first signals that a company can’t pay dividends, or won’t be able to in the near future, is to look at the company’s earnings trend and its payout ratio.

Looking at a Historical Example

During the second half of the 1990s, AT&T’s stock faced more and more competitors as deregulation went into effect. According to the company’s income statements from 1998 to 2000, annual earnings per share dropped by 50 percent.  

This data is according to AT&T’s 10-K, which shows that its yearly earnings dropped from $1.96 in 1998; to $1.74 in 1999; and finally to $0.88 in 2000. With this precipitous decline in earnings and the financial pressure it put on AT&T, a reduction in dividends came next. Based on this data and some analysis, we can explain how the Dividend Payout Ratio works.

Understanding the Dividend Payout Ratio

Using this ratio can help investors gauge how likely a company’s dividend will be cut or removed altogether.

Dividend Payout Ratio = Dividend Payment per Share / Earnings per Share

Looking at AT&T’s 10-Q report for Q3 of 2000, AT&T earned 35 cents per share and gave shareholders a dividend of 22 cents a share. Based on the dividend payout ratio formula, the resulting ratio was 0.63. This ratio means that 63 percent of AT&T’s earnings were given to shareholders via dividends. When companies have challenging earnings seasons, the payout ratio gets closer to 1 because whatever the company earns is eaten up by the dividend. Therefore, the closer the ratio gets to 1, the more likely the dividend will be lowered or suspended.

While there’s no predicting what the economy will do in the future, looking at past trends can give investors insight into what companies will do with their dividends when the economy faces new headwinds.

With the CARES Act (Coronavirus Aid, Relief and Economic Security) signed into law by President Trump on March 27, this set into motion major initiatives by the U.S. government in response to the coronavirus’ economic impact. This Act provides $2 trillion in financial aid to the nation, in big part to soften the impact of the coronavirus’ hit to the country’s unemployment numbers.

For the week ending April 11, seasonally adjusted jobless claims came in at 5,245,000, a drop of 1,370,000 from the April 9 revised level of 6,615,000, according to an April 16 news release from the U.S. Department of Labor.

For the week ending April 18, seasonally adjusted initial claims were reported at 4,427,000, or 810,000 fewer than the prior week’s revised level, according to an April 23 news release from the U.S. Department of Labor. April 11’s adjusted level was lowered by 8,000 to 5,237,000, down from the original 5,245,000 figure.

Taking into account the cumulative unemployment claims over the past five weeks, there have been approximately 26 million workers in the United States put out of work due to the coronavirus and the resulting economic downturn. With the employment picture facing a grim reality, the CARES Act provides many relief programs.

One part of the law provides financial relief for individuals, families, and businesses. Highlights include direct payments of $1,200 for individuals making up to $75,000, $112,000 for heads of households, and $150,000 for joint filers. Enhanced unemployment benefits also are included in the law to help those who are laid off, including contract workers.

Another way the CARES Act helps stimulate the economy is through the Paycheck Protection Program. Funded at $349 billion, this SBA-backed loan is designed to offer financial help to struggling businesses impacted by the coronavirus. A key aspect of this program is to give businesses enough money to pay at least eight weeks of payroll and related expenses to increase their chances of staying in business.

Factors for eligibility to apply for PPP loans include companies that are able to demonstrate their business has been reduced by Covid-19 and have less than 500 workers on their PPP application. Examples of eligible businesses/individuals include independently-owned franchises, contractors/self-employed individuals, tribal businesses, hotels, and restaurants. Eligible companies are able to have their loans forgiven, up to $10 million if they are borrowed from an SBA-approved 7(a) lender.  

According to the U.S. Department of the Treasury, loans may be forgivable if the following criteria are met. No less than 75 percent of the loan is to be used for payroll costs, at which payroll costs on a 12-month basis are maxed out at $100k. Other allowable loan funds, up to 25 percent of the loan proceeds, can be used to pay for rent, utilities or mortgage interest. However, if full-time staffing is reduced or if the salary is reduced by more than 25 percent for full-time employees making less than $100k per 2019’s salary, PPP borrowers may owe money back. However, if any disqualifying changes that occurred between Feb. 15 and April 16 are made whole by June 30, the loans can become re-eligible to be forgiven.

Economic Injury Disaster Loan

Another significant relief program the CARES Act provides in the way of economic relief is through the Economic Injury Disaster Loans program (EIDL). The EIDL program is generally for businesses with 500 or fewer employees, whereby the company can apply to borrow as much as $200k. Loans up to $25,000 require no collateral, and requests above $25,000 require only business assets to serve as collateral.

One significant provision of the EIDL is what’s referred to as the Economic Injury Disaster Loan Emergency Advance. This enables applicants of the EIDL to receive as much as $10,000 in relief that’s not required to be paid back, creating a de facto grant, per the U.S. Small Business Administration. Businesses can receive as much as $1,000 per employee, up to $10,000, based on the number of workers a business employs. Depending on how extensive a business has suffered economically, a maximum of $2 million can be borrowed by a business through EIDLs and/or physical disaster loans, according to the U.S. Small Business Administration.

With these and other domestic government stimulus programs, coupled with other countries implementing their own stimulus programs, it’s worth noting different potential outcomes depending on the pandemic’s severity and health mitigation factors. According to the Organization for Economic Cooperation and Development, the following are some forecasts on how Covid-19 is likely to impact the global economy:

• While the coronavirus data from China has been questioned, the OECD says that assuming the infections from the coronavirus peak during Q1 in China, the world’s economy is expected to grow less than projected for 2020, dropping to 2.4 percent from 2.9 percent. And while China’s economy is expected to drop below 5 percent in 2020, the country is expected to exceed 6 percent growth in 2021.
• The OECD also noted that with a pandemic lingering longer and with greater intensity throughout the Asia-Pacific region, North America and Europe, it projects worldwide growth to drop to 1.5 percent in 2020.

Only time will determine how much of an impact the coronavirus will have on global markets. Governments around the world will continue to do their part to mitigate negative impacts.

Over the past six years, domestic crude oil has experienced a volatile ride. 2014 saw the emergence of American shale as producers were attracted to the $114 price levels. However, in 2016 the price for a barrel eventually fell to $27 as a global supply glut developed. 2016 also saw Russia and Saudi Arabia form an oil pact that drew together Russia and OPEC, leading to the so-called OPEC+ to navigate the global oil market. This agreement would eventually culminate into the current crude oil tensions that exist between Saudi Arabia and Russia.

Through the early 2000s – up until the financial crisis of 2008 – increasing global demand accounted for the rising price per barrel of oil. After reaching a high of $147.27 the week of July 7, 2008, the financial crisis’ effects brought the price of West Texas Intermediate Crude down to a low of $32.98 in December of 2008, according to the U.S. Energy Information Administration. However, with the economy recovering through 2009, the price of WTI crude oil rose to the high $70s and low $80s.

After the world emerged from the financial crisis, world oil markets were rocked by geopolitical tensions from the political revolution in Egypt during January 2011, spiking the price of crude oil to $100 a barrel. Prices stayed in the $90 to $100 per barrel range, until the end of 2014. With increased production in North America, reduced demand from emerging economies and increased storage of crude worldwide, the price per barrel of crude oil in 2016 traded in the low $30s per barrel. The price of oil fell because Saudi Arabia attempted to flood the world market with excess oil to lower the per-barrel price to bankrupt the emerging U.S. frackers.   

In reaction to the low oil prices, OPEC and its non-OPEC oil-producing countries agreed to reduce their total output by 1.8 million barrels in December 2016, taking effect in January 2017. After OPEC reversed itself and increased output in June 2018, it again cut output for 2019. The price of WTI rose to the mid-$70s by October 2018, which can also be attributed to a drop in Venezuela’s oil production, and the re-introduction and increase in severity of sanctions against Iran.

A November 2018 report by the U.S. Energy Information Administration (EIA) relayed that the U.S. produced 11.3 million barrels in August 2018. With the report’s news, additional Russian oil production and even some OPEC countries producing more, it brought WTI down to $51 per barrel. Fast forward to March 2020, with the coronavirus sending shockwaves and diminishing demand, oil prices fell.

This led to a meeting in Vienna on March 5 for OPEC and its (+) or other major oil-producing companies throughout the world to discuss production cuts in hopes of increasing the price of oil. During this meeting, OPEC and its (+) members discussed whether to reduce production by 1.5 million barrels a day through the end of June 2020. OPEC asked Russia and those (+) members to cooperate with the production cuts. However, on March 6, Russia did not agree to reduce oil production. This immediately dropped the price of oil by 10 percent.

With the coronavirus pandemic beginning at the end of 2019, manufacturing and transportation decreased, reducing the global thirst for oil. Based on these events, the International Energy Association (IEA) announced in the middle of February that global consumption would fall to 825,000 barrels per day.

Russia said that reducing production was premature because it was and still is uncertain of how the coronavirus will affect global oil prices. Additionally, they cited political instability in Libya, where approximately one million barrels per day were expected to be offline from production.

In light of the unknown extent of the coronavirus pandemic’s impact on oil demand, Russia and its oil producers reportedly offered to maintain the existing 1.7 million barrels per day cut for the next three months that OPEC+ already had in place. However, OPEC didn’t agree to this offer.

Beginning on March 8, Saudi Arabia gave crude oil buyers discounts of between $6 and $8 per barrel to European, Asian and American buyers. This set a downward cascade of the price of oil, lowering Brent Crude by 30 percent and West Texas Intermediate by 20 percent.

Starting March 9, the drop in oil prices coupled with the global coronavirus pandemic exerted a major impact on world markets. Russia’s ruble dropped by 7 percent shortly thereafter. While the price of oil recovered a little after the impact, it set off a production war between Russia and Saudi Arabia. Beginning March 10, Russia began pumping an additional 300,000 barrels per day, and Saudi Arabia ramped up its production to 12.3 million barrels per day, up from 9.7 million.

Impact on Markets

These two factors led the Dow Jones Industrial Average to drop more than 1,300 points in pre-market trading on March 9, with the DOW ultimately falling 2,000 points during intraday trading. Along with NASDAQ falling by nearly 7 percent and the S&P 500 dropping more than 7 percent, global markets fared worse. This was evidenced by the Italian FTSE MIB Index losing more than 11 percent. 

Producer Implications

When it comes to how the crude oil war is impacting shale producers in North America, it’s important to note that prices of $40 per barrel must be sustained to keep producers afloat, according to consultant Enverus. However, production cuts are imminent at the bottom of the $30 a barrel price point, and there’s certainly no expectations of new oilfield development.

Based upon forecasts from the U.S. Energy Information Administration, May 2020 U.S. production of crude oil is expected to drop from 13.2 million barrels per day to 12.8 million barrels per day by December, finally leveling off to 12.7 million barrels per day in 2021.   

Much like the volatility going on with the coronavirus pandemic, global markets are also expecting further volatility for the world’s energy market.

According to the World Economic Forum (WEF), the spread of the coronavirus will impact the world’s economy. Whether it’s a Reuter’s poll from economic experts projecting growth in China slowing to 4.5 percent in Q1 of 2020, in contrast to China’s Q4 GDP of 6 percent; or the International Energy Agency (IEA) saying world desire for oil will be lower due to the coronavirus; or global companies reducing or temporarily closing their Chinese factories, change is on its way. Based on this data, what does the global economic outlook entail?

In order to understand how the coronavirus might impact global economies, it’s important to put this in context of other global events. Based on a February 2020 Monetary Policy Report from The Federal Reserve, there’s a mixed outlook for recent and projected economic activity. While the Fed notes that oil prices have increased over the past six months of 2019, in part due to OPEC members cutting production and brief tensions with Iran in January 2020, The Fed attributes more recent drops in oil prices to the coronavirus and associated lowered global demand.

Due to China’s already slowing economy, the IEA is projecting 435,000 fewer barrels of oil on an annual basis during Q1 of 2020, the worst in a decade. Looking at statistics from the United Nation’s International Civil Aviation Organization (ICAO), airlines are expected to see revenue losses of between $4 billion and $5 billion in the first three months of 2020. With the coronavirus impacting China, thereby reducing outbound travel to Japan and Thailand, losses could be as big as $1.29 billion and $1.15 billion for each respective country.  

The Fed explains that in 2019, manufacturing has been challenged both globally and domestically. Citing the industrial production (IP) index, the first six months of 2019 saw declines in both domestic and global activity. For 2019, U.S. production dropped by 1.3 percent for durable and non-durable goods. This is attributed to trade issues with China, soft economic growth worldwide, less than aggressive investment from businesses, declining oil prices that lower continued production by crude producers and production issues with Boeing’s 737 Max airplanes.

However, despite the manufacturing slowdown in China, the United States’ manufacturing base shouldn’t see the same impact from the coronavirus. The Fed says that factoring in purchasing materials for production on the input end, and transporting, wholesaling and retailing products post production, the drop of 1.3 percent on the industrial production index equates to a 0.5 percent drop in U.S. GDP. For context, compared to the U.S. manufacturing employing 30 percent of workers 70 years ago, it presently employs 9 percent of workers.     

One way to see how the coronavirus might play out is to look at how SARS impacted China in 2003. Based on data from the National Bureau of Statistics in China, it took three months, during Q1 of 2003, where China’s economic growth dropped to 9.1 percent, from 11.1 percent. While a much smaller economy, on a global scale, in future quarters China was able to grow at an annualized rate of 10 percent, per Refinitiv. However, economists note that if SARS didn’t impact China, there could have been another 0.5 percent to 1 percent increase in annual growth.   

Another comparison with SARS is China’s retail sales. Refinitiv shows that May 2003 retail sales dropped to 4.3 percent. This is compared to between 8 percent and 10 percent for retail sales figures in March 2003 and July 2003, showing how serious the impact SARS made, but also China’s resiliency.

While the Chinese economy impacts the global economy today more than when SARS hit, it also has a more responsive economy and a larger middle class. Only time will tell as to the coronavirus’ impact, but based on past experience, it should only be a matter of time before China’s (and the global) economy bounces back to greater economic output. 

According to a Jan. 16 press release from the U.S. Department of the Treasury, within the first six months of 2020, the federal department will begin issuing a 20-year Treasury bond. This is the U.S. government’s attempt to maintain and support the federal government’s ability to borrow into the future. This action will also have an impact on the markets going forward, especially when it comes to the Federal Reserve and its monetary policy.  

The Federal Reserve’s many purposes include promoting stability and growth in the economy by keeping prices stable and healthy employment levels. The ways The Fed does this is by influencing short-term interest rates, being active in Open Market Operations (OMO) and impacting reserve requirements.

The Federal Reserve Bank of St. Louis details that along with providing banks with loans from the federal funds market to support adequate reserves and liquidity, it’s important to understand how Open Market Operations function.

Much like individuals and institutions can buy or sell securities, The Fed can buy or sell securities, including U.S. Treasury bonds. The buying and selling are the operations portion. The open market refers to the fact that The Fed doesn’t transact directly with the U.S. Treasury, but works on the open market via auctions through the Trading Desk of the New York Fed.

Assuming there’s a modification to the federal funds rate’s target range by the Federal Open Market Committee (FOMC), the directive starts the reaction to either purchase or sell government securities to meet the new target. The OMO is one way the Fed adjusts its two-pronged mandate of promoting employment and maintaining target inflation.       

If the Fed wants to stimulate the economy, it can do so through Treasury bond purchases. This occurs when the Fed makes a deposit into the seller’s bank account via the Trading Desk. This purchase increases the reserve balance of the bank offering the Treasury bond for sale, which increases the bank’s ability and willingness to lend.

In the opposite scenario, the Fed can reduce the amount of money available that banks can use for lending. This time the Fed sells government securities, prompting banks to remove money from their bank accounts, reducing the amount available for lending. As pressure on the federal funds rate increases, rates will go up, making loans cost more for borrowers and incentivizing savings.

During the financial crisis, the FOMC engaged in quantitative easing (QE) after it brought the federal funds rate to near zero. This approach consisted of buying longer-term U.S. Treasury securities and mortgage-backed securities (MBS) through open market operations. As the St. Louis Fed explains, in exchange for the Fed buying these securities, banks receive a credit that increases their reserve balances above reserve requirements. While this was far more prevalent during the financial crisis, the 20-year U.S. Treasury bonds will undoubtedly make QE easier to re-engage in.

While the government may benefit from the direct investment and its ability for the Fed to guide the economy, there are a few potential risks for those who invest in U.S. Treasury bonds. Compared to many other investments, Treasury bonds have lower yields, which are even lower when inflation runs high. Another risk is that when rates rise, the value of the Treasury bond goes down, creating less attractive debt if the owner wants to sell it.

The Jan. 16 press release noted that more details on the 20-year bond will be available in the U.S. Treasury’s quarterly refunding statement on Feb. 5. Only time will tell the level of interest among investors and how effective this instrument will be in creating further cash flow for the U.S. Treasury.

When it comes to 2020 and energy prices, the world’s energy market will face many known and unknown variables. How and what types of events that will ultimately play out are unknown but, according to industry and government experts, there are some variables that are projected to lead to lower global prices overall.

Based on a Dec. 10 short-term energy outlook publication from the U.S. Energy Information Administration (EIA), there will be a mix of pushes and pulls on the price of crude oil and associated refining products. Market prices in 2020 for Brent crude oil is expected to average around $61, compared to 2019’s $64 average price per barrel. Looking at West Texas Intermediate (WTI) quotes, the EIA sees this type of crude settling, on average, at about $5.50 per barrel lower than Brent crude oil in 2020. The EIA bases its lowered price forecast on greater supplies of oil globally, especially in the first half of 2020. 

The agency’s data shows that in September 2019, America exported more than 90,000 net barrels per day of products from and crude oil itself. This is coupled with domestic export projections of 570,000 net barrels per day in 2020, in contrast to average net imports of 490,000 barrels per day in 2019.

According to EIA’s projections, U.S. crude oil production will grow by 900,000 barrels per day in 2020, compared to 2019’s production, resulting in 13.2 million barrels of daily production in 2020. This growth is compared to 2019’s production gains of 1.3 million barrels per day, and 2018’s 1.6 million barrel per day growth. The decrease in production, attributed by the EIA, is due to increased rig efficiency and well level productivity, despite the number of rigs dropping.

The EIA believes that OPEC and its “+” oil producing states will go beyond announced oil production cuts on Dec. 6, further cutting production through March 2020. The original cuts of 1.2 million barrels per day, announced in December 2018, have been modified to reducing production to 1.7 million barrels per day. The EIA expects the major global producers to keep production curtailed through all of 2020, due to increasing global oil inventories.

Fuel Standard’s Impact on Oil Prices

Through implementation of the International Maritime Organization (IMO), Jan. 1, 2020, is ushering in new standards for allowable levels of sulfur in bunker fuel. This fuel will be required to contain no more than 0.5 percent sulfur content, compared to current allowable levels of 3.5 percent of the bunker oil’s weight. In reaction to the new standards, the EIA expects American refineries to increase operations by 3 percent in 2020 versus 2019’s production. It’s expected to increase wholesale margins in 2020 to 57 cents per gallon, on average, with it spiking to 61 cents per gallon. This is compared to 45 cents a gallon in 2019.

The Federal Reserve and Oil Prices

According to the Dec. 11, 2019, FOMC statement from The Federal Reserve, there was no modification to the federal funds rate. They based their decision on a yearly measure for inflation, excluding food and energy, along with signs of continued economic expansion, including healthy job creation and continued high rates of employment. However, the Fed indicated that if its goals of fostering a growing economy, maintaining a healthy job market and a 2 percent inflation target fall short, it will take appropriate action to keep supporting economic expansion. Depending on the Fed’s action to lower, increase or maintain its rates, the price of oil would feel the impacts.

While there’s no telling how fiscal policy and geopolitical events will play out in 2020, it looks like the price of oil will head south.

The so-called phase one of a trade deal with China is expected to contain a provision for $40 billion to $50 billion in purchases of American agricultural products by China, according to an October news release from U.S. Sen. John Hoeven (D-ND) With ongoing discussions surrounding the US-Sino trade talks, there are rumors for such a partial trade deal. But how has the recent past impacted both countries’ economies and a mutual desire for better trade deals?

While not directly related but announced during a similar time frame, a November press release from the United States Trade Representative (USTR) announced Chinese acknowledgment and acceptance of American poultry exports. This stated that China will now accept $1 billion in American poultry and related poultry products, effectively reversing China’s ban.

After a December 2014 avian influenza outbreak, China banned US poultry in January 2015. America exported more than half a billion dollars of poultry to China in 2013, and there has been much interest in restarting exports to China since August 2017. With the USTR citing U.S. poultry exports of $4.3 billion in 2018, this will undoubtedly ensure America maintains its position as the globe’s second biggest poultry exporter.

According to a late October press release from the USTR, there will be a 30-day comment period in November to garner public opinion on continuing tariff exemptions on certain Chinese goods, worth approximately $34 billion. The items currently exempt are set to reverse exclusion on Dec. 28. Additionally, as part of phase one discussions, the United States is expected to not implement tariffs scheduled to take effect on Dec. 15, along with rolling back existing tariffs in stages.

Trade War’s Impact

According to BNP Paribas Wealth Management, the trade impasse between the United States and China has had a measurable negative impact on the world’s economy. BNP cited a 1.2 percent point reduction in growth over the past 1.5 years.

However, the phase one deal is expected to include many provisions, such as $40 billion to $50 billion of US farm product exports to China, along with $16 billion to $20 billion of Boeing aircraft for commercial use to China.

Financial institutions outside of China will be able to establish insurance companies in mainland China, financed by ex-China investments, along with being able to hold shares in the newly created entities. Ex-China lending institutions will be able to create wholly owned banks and conduct business in the Yuan or Renminbi (RMB) currency throughout mainland China without explicit approval from Chinese officials.

These developments, according to the Chinese State Council and China Banking and Regulatory Commission and CNBC, are part of the ongoing discussions to determine how China will increase IP protection and the aforementioned agricultural purchases. Announced on Oct. 11, 2019, the China Securities Regulatory Commission will work on lifting limits on ownership ceilings for ex-China entities, specifically in mutual funds, securities and futures operating in China.

BNP also mentions expectations of Dec. 15, 2019, tariffs to not be implemented, along with expectations for existing tariffs to be relaxed or reduced. In addition to giving American farmers increased sales, this will provide China with more soybeans for domestic consumption, including an ability to help increase the number of the country’s pork livestock population through feedstock. If phase one is agreed to, it’s also expected to help the RMB appreciate. Based on recent data, the RMB has appreciated by three percent since September 2019.   

One noteworthy item that depends on a phase one deal being certified is the expectation that it will positively impact the global economy. The International Monetary Fund dropped its World Economic Outlook gross domestic product projection from 3.2 percent in July 2019, down to 3.0 percent, based on the current trade tensions.

Since there’s great hope for a phase one deal that will encourage mutual and global economic development, there’s confidence that both countries facing economic hardships will find a short-term resolution.

According to the U.S. Department of Commerce and the U.S. Census Bureau, retail sales came in at a negative 0.3 percent for September, even though it’s still 4.1 percent more than September 2018’s report. The same report followed up on August 2019’s numbers, with a revision by the agency to 0.6 percent, up from 0.4 percent. With the ongoing U.S.-China trade war and tariff uncertainty, how will consumer spending be impacted?

Current State of Trade and Tariffs

With phase one agreed to, at least in principle, at the end of the meeting with Chinese Vice Premier Liu on Oct. 11, President Trump agreed to keep tariffs at 25 percent on $250 billion in Chinese imports, instead of increasing the tariffs to 30 percent. Additional tariffs also are threatened to be imposed on Dec. 15 for other goods, depending on future negotiations. However, by then the fourth quarter will be nearly completed, so this will probably lessen the likelihood of reduced U.S. consumer spending during the holiday shopping season.

According to an Oct. 3 press release, the National Retail Federation (NRF) projects that consumer purchases for the 2019 holiday season will come in between $727.9 billion and $730.7 billion. The current holiday spending is projected to grow between 3.8 percent and 4.2 percent compared to 2018. It’s important to note that the NRF’s 2019 projections don’t include restaurants, auto dealerships or gas stations. And the projections are higher despite an average retail sales growth of 3.7 percent over the past five years.

The NRF says that along with interest rate and global economic concerns and a politicizing of the economy, trade is an equally concerning factor for retail sales.   

As the Office of the United States Trade Representative (USTR) announced an additional 10 percent of tariffs on $300 billion in Chinese imports, effective Sept. 1, the NRF explained that consumer confidence was shaken. A September 2019 NRF survey found that 79 percent of retail shoppers were worried that tariffs will increase the prices of goods they would be buying.

With the USTR reporting on Aug. 23 that $112 billion of Chinese imports will face tariffs of 15 percent, up from 10 percent, on Sept. 1, the NRF explains how it impacts consumer items, especially footwear and apparel. The NRF gives a few examples of how consumers, specifically football fans, will be impacted negatively.

Footballs made in China are now subject to 15 percent tariffs, no longer 10 percent. While sweatshirts, T-shirts and jerseys (for football and all professional sports teams made in China), are subject to a 15 percent tariff – this is still a sizeable cost increase. If these were subject to 25 percent tariffs, research by the Trade Partnership done for the NRF found that it would cost U.S. consumers $4.4 billion extra for this type of apparel.

While it hasn’t happened yet, the $160 billion of Chinese imports currently subject to 10 percent tariffs are expected to be increased to a 15 percent tariff on Dec. 15. While it’s still expected to be implemented at the tail end of Q4, any effects will naturally be felt in 2020.

While there’s no way to determine how tariffs will impact retail sales officially calculated, consumers will certainly take a second look at prices whether or not they make a purchase.

With the United States Department of Agriculture’s Foreign Agriculture Service announcing a purchase of 204,000 metric tons of U.S. soybeans by private Chinese importers, there are hopes that the trade war is beginning to dissipate.

Seeing that the last significant purchase of U.S. soybeans by China was in June, professional traders see the September acquisitions as a potential weakening of the U.S.-China trade war. With the USDA’s Foreign Agricultural Service announcing more than 600,000 tons of U.S. soybeans purchased by private Chinese operators on Sept. 13, 16 and 17, there are signs of positive movement between the two nations.

The shipments are expected to leave between October and December from ports in the Pacific Northwest. Looking at the Chicago Mercantile Exchange, soybean futures hit monthly highs on Sept. 16. Coupled with November futures contracts well off their lows, this shows renewed promise. The purchase of soybeans is part of China’s gesture of goodwill to buy other agricultural products, such as pork, during ongoing trade negotiations.

These recent developments are important because China increased tariffs on American soybeans by 25 percent in July 2018 in response to the Trump Administration’s tariffs. On Sept. 1, 2019, U.S. soybeans were subject to another 5 percent in import tariffs by China.

The Context of Soybean Sales

Based on data from the United States International Trade Commission (USITC), there was a drop in soy exports from the U.S. to China to $3.1 billion, or 18 percent of U.S. soybean exports for 2018.

The 2018 U.S. soybean export figure to China represents a drop of 75 percent, compared to 2017’s U.S. sales exports of soybeans worth $12.2 billion to China. The large drop in 2018 is also noteworthy against U.S. exports of soybeans to China in 2016 of $10.5 billion. This drop was directly attributable to trade tensions.

It’s important to note that soybeans are America’s biggest agricultural export (16 percent of all agricultural exports) – $20.9 billion annually on average between 2014 and 2018. With China importing more than 50 percent of U.S. soy over the past 60 months, it illustrates why the trade war has been so impactful. In response to the sharp drop in exports to China, 2018 began the quest for U.S. growers of soybeans to counteract the $9.1 billion drop in soy exports to China by finding new buyers in Mexico, the European Union and Egypt.

Similarly, as the Congressional Research Service points out, trade talks are working toward building upon an existing $12.9 billion of U.S. agricultural exports to Japan, as of 2018. Current talks have expectations for an additional $7 billion in U.S. agricultural exports to Japan. Soybeans, along with dairy, wine, beef and pork, are examples of agricultural imports Japan is willing to buy, based on soon-to-be released details from finalized U.S.-Japanese trade talks.  

However, despite maintaining a competitive or even subpar price against competitor nations such as Brazil, it didn’t sway the Chinese to buy more American soy. Much like American farmers and with China’s state-influenced help, there may be long-term, structural changes for future Chinese soybean purchases even if trade tensions subside. However, China also has established new suppliers of soybeans from Ukraine, Kazakhstan and Russia.

While many do expect a trade deal between the United States and China, there could very well be structural and long-lasting changes on how both countries conduct trade for years to come.